01.06.2012

By Simon Miller

The Securities and Exchange Commission (SEC) has approved two proposals to address extraordinary volatility in individual securities and the broader US stock market.

The first establishes a 'limit up-limit down' mechanism that will replace existing single-stock circuit breakers that were being piloted after the flash crash.

The proposal works by preventing trades in individual exchange-listed stocks from occurring outside of a specified price band.

The second initiative updates existing market-wide circuit breakers that when triggered, halt trading in all exchange-listed securities throughout the US markets.

The existing market-wide circuit breakers were adopted in October 1988 and have been triggered only once, in 1997. The changes lower the percentage-decline threshold for triggering a market-wide trading halt and shorten the amount of time that trading is halted.

The exchanges and the Financial Industry Regulatory Authority (FINRA) will implement these changes by 4 February, 2013 on a one-year pilot during which they will be assessed to consider any further modifications.

“The initiatives we approved are the product of a significant effort to devise a sophisticated, yet workable and effective way to protect our markets from excessive volatility," said SEC chairman Mary Schapiro.

“In today’s complex electronic markets, we need an automated and appropriately calibrated way to pause or limit trading if prices move too far too fast. The Commission, along with the exchanges and FINRA, will be closely monitoring the operation of the new limit up-limit down and market-wide circuit breaker processes during the pilot period to make sure any rules approved on a permanent basis are as effective as they can be," she added.